Which debt should you pay off first?

If you’re carrying debt on more than one credit card or loan, you’re not alone. The average American has $4,192 in credit card debt, and that doesn’t include additional debts, such as mortgages, car loans and student debt. A lot of us are trying to pay off multiple credit accounts simultaneously.

With all these outstanding balances, which debt should you pay off first? While you should always make at least the minimum monthly payment on every debt you owe, it can be hard to know how to prioritize any extra debt-repayment dollars each month.

While paying off your highest interest debt first is a common strategy, there are benefits to tackling your smallest debt first, regardless of interest, and working your way up to your largest debt. Let’s look at how to choose which debt to pay off first, as well as the pros and cons of various debt repayment scenarios.

Why you should pay off the highest interest debt first

There’s a good reason to pay off your highest interest debt first—it’s the debt that’s charging you the most interest! Credit cards with higher-than-average APRs can be especially hard to pay off, and anyone with a student loan or mortgage knows the frustration of making monthly payments that only go towards the interest, not the principal.

If you want to get rid of that high-interest debt as quickly as possible, start focusing your debt repayment efforts on your highest interest debt first. Keep making the minimum monthly payments on all of your credit cards and loans, but put every extra penny you can towards the card or loan with the highest interest rate. If you need help, here’s a list of seven steps to help you pay down your debt as quickly as possible.

While focusing on your highest interest debt first is a smart move, it isn’t necessarily the best option for everyone. If you’re making monthly payments on many different debts, for example, you might not have a lot of extra money to put towards your highest interest debt. In that case, it might be smarter for you to pay off your small debts as quickly as possible—which brings us to our next debt repayment strategy.

Why you should pay off the smallest account first

While some people choose to tackle their debt based on interest rate, other people take a different tactic: paying off their smallest debt first and working their way up to their largest debt. This debt repayment method is called the debt snowball, popularized by financial guru Dave Ramsey, because it starts small and grows over time.

The snowball method works because paying off a debt in full incentivizes you to keep working towards your goal—and as you pay off your smaller debts one by one, you’ll have more money to put towards your larger debts. Yes, you might end up paying more in interest than you would have paid if you tackled your highest interest debt first, but the psychological benefits of getting those smaller debts paid off as quickly as possible can be very rewarding.

To get started with your debt snowball, list all of your current debts—and their current balances—from low to high. Continue to make the minimum monthly payment on all of your debts while putting as much extra money as possible towards your smallest debt. Once that debt is paid off, put your extra money towards your next-smallest debt, and so on. The bigger you build your debt snowball, the closer you’ll get to debt freedom.

How to choose which debt to pay off first

If you want help choosing which debt to pay off first, Bankrate’s debt paydown calculator can help you create an optimized debt repayment plan. Simply enter all of your outstanding debts, the interest rates and the minimum monthly payments, as well as the amount of additional money you can afford to put towards debt repayment every month.

The calculator will run the numbers for you and provide you with a customized debt repayment strategy that tells you exactly how much money to pay on each debt every month, as well as how long it will take until you’re debt-free. It will also tell you where to put any extra debt repayment money—so if you end up with a little extra cash at the end of the month, you’ll know which debt to put it towards.

Consider debt consolidation

If you want to consolidate your debt into a single monthly payment, you have a few options. You could transfer your existing credit card balances onto a balance transfer credit card, many of which come with lengthy zero percent introductory APR periods. The top balance transfer credit cards offer between 15 and 21 months of zero percent APR on balance transfers, giving you ample time to start paying off your debt without paying interest on your transferred balance.

You could also take out a personal loan and use that money to pay off high interest debt. Yes, you’ll still need to pay off your personal loan, but if you can find a loan that offers considerably lower interest rates than what you’re currently paying, it might be a way to lower the overall cost of your debt repayment process. Use Bankrate’s debt consolidation calculator to figure out how much you could save by taking out a personal loan.

Lastly, you might want to consider consolidating your debts through a home equity loan or home equity line of credit. Bankrate’s home equity calculators can help you determine whether tapping your home’s equity in order to pay off your debts would save you money in the long run. Remember, if you fall behind on your mortgage payments, you run the risk of foreclosure—so think carefully before taking out a second mortgage to pay off other debts.

The bottom line

Deciding which debt to pay off first is less important than committing to paying off your debts. Focusing on the highest interest debt and the smallest debt both have their benefits, and debt calculators can help you optimize your debt repayment plan and decide whether debt consolidation is right for you—but as long as you’re putting as much money as possible towards your debts, you’re on the right track.